The vaccine rollout is in full swing…

Restaurants, bars, and other businesses are opening back up. And the worst of the pandemic is likely behind us.

Folks are getting back to normal as best they can. It’s happening fast. And we’re seeing it show up in the numbers.

Activity in the service sector is at the highest level on record. This is a good sign for investors. It means there’s more upside potential ahead for U.S. stocks.

Let me explain…

It has been a tough year. But the COVID-19 crisis seems to be nearing its end here in the U.S.

The U.S. economy is absolutely booming as a result. One way to see it is from the Institute for Supply Management (“ISM”).

This association puts out monthly updates on different segments of the U.S. economy. The goal is to gauge how well each part of the broad economy is doing.

For the service sector, ISM looks at four indicators – business activity, new orders, employment, and supply deliveries – using an equal weighting for each. Then, it spits out a number to signal the overall health of the sector.

We can see this on ISM’s Purchasing Managers’ Index (“PMI”). A reading above 50 indicates that the service sector is expanding. It’s a sign that this part of the economy is in good shape. A number below 50 is a sign of contraction – something we don’t want to see.

The service sector reading hit 63.7 in March. That’s the largest expansion reading in the history of this index. Take a look…

Now, not all economic data can tell us something about the stock market. In fact, most indicators are pretty useless at predicting stock prices… But that’s not the case here.

Instead, a good services PMI reading sends a clear message: We want to own U.S. stocks.

When the service sector is in expansion – a reading above 50 – stocks tend to do well. But when this sector of the economy is contracting, it’s a bad sign for the market.

The S&P 500 Index does poorly when the service sector is struggling. The typical annualized return in a contraction period is -3.7%. History shows that you are much better off owning stocks when the service sector is doing well…

When this part of the economy is expanding, we see a typical annualized gain of 7.4% in the S&P 500. Fortunately, we’re seeing an expansion take place right now.

The service sector hit its highest ISM rating on record in March. It’s well above the expansion threshold of 50. And it’s another sign that more gains in the S&P 500 are likely from here.

Good investing,

— Chris Igou

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Source: Daily Wealth